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From Internet to Biotech

Hey there, Fools. It's the start of a long weekend for many of you (though not those of us who live and die with the stock market). Think about taking a little trip to the shore -- this may be the last long weekend with good weather for the next six months.

(If you're going to be gone and you want to make sure you don't miss anything, you can always sign up to get the Rule Breaker delivered to your inbox.)

There's been a noticeable shift in focus for the Rule Breaker from Internet stocks to biotech stocks in the last year or so. That the market has followed that same course is probably not coincidental. The enormous strides that have been taken in biotechnology recently have created vast potential for future profits. Of course, it's also created a bunch of fabulously expensive stocks that will never make a dime. Investing in them is so risky that it makes investing in Amazon.com(Nasdaq: AMZN) look like a value play -- which it's not, as Paul Commins (TMF Buster) explains in the recent Dueling Fools.

Any investor in biotech stocks needs to be very well informed. To that end, the Fool is offering a five-week, 15-lesson biotechnology seminar, which starts October 16. You'll also get the Motley Fool Research Guide to Biotech Investing (a $35 value) for free. Enrollment ends October 11 (that's next Wednesday), so get your order in before you disappear on that holiday retreat.

Biotech's gain has in some ways been the Internet's bane. Many companies thought the Wall Street gravy train would never jump the rails. They knew that they would need to raise scads of cash from the capital markets at a later date and assumed that it would be just as easy to get access as it had been the first time around. Well, that hasn't been the case, as Peapod(Nasdaq: PPOD) and CDNow have learned the hard way.

Even a former high-flier like priceline.com(Nasdaq: PCLN), which Jeff examined from a Rule-Breaker perspective last week, has suffered from reluctant financiers. It announced yesterday that Priceline WebHouse Club, a privately held licensee that handles priceline's grocery and gasoline services, will cease operations in 90 days. The cause? Inability to raise capital to fund operations in the coming year. The company's plans to diversify its revenue streams just became a little more complicated.

Still, though the flow of capital has slowed significantly, the Internet sector is far from dead. That's good, because Internet stocks remain our bread and butter, making up about 60% of our humble portfolio.

eBay(Nasdaq: EBAY), though it's down some 10% year-to-date, has shown signs of life in the last couple of months after scraping a 52-week low in July. The stock jumped like the bidding on a rare William Shatner priceline rookie card two weeks ago after management asserted that the company would reach $3 billion in revenue in 2005 -- a 50% annual growth rate. eBay also projected that gross margins would reach 80% and operating margins 30-35%.

Ebay had said that it could reach those margin levels in the past, but the revenue projections were new and ambitious -- well above analysts' average estimates of about $2.5 billion. Jeff Fischer, the man behind our eBay research report, thinks that management's new revenue goal is -- smartly so -- a little conservative. Out on a limb by himself, he has estimated since February in his reports that eBay's revenue would come in at around $3.8 billion in 2005, with 34% operating margins. Now his numbers don't seem quite so "out there."

America Online (NYSE: AOL) saw its stock rise about 15% over the past four days as it nears its merger with Time Warner (NYSE: TWX). The European regulators are reportedly ready to let the merger happen, especially now that Time Warner called off its merger with EMI music. Time Warner called it off in order that this former "sticking point" with European regulators wouldn't slow the AOL-Time Warner merger. Regulatory agencies feared that the purchase of EMI would give AOL Time Warner too much control of the music industry. The company can reapproach EMI for a merger later, on different terms, once its merger is complete -- although there are no guarantees that this will happen, of course. Either way, shareholders didn't mind that the EMI merger was called off for now.

After spending much of 2000 stuck in the $50s, AOL's stock rose this week in anticipation of a November close to the merger that matters most, the biggie. (Europe should give its ruling by October 24.) We wouldn't be surprised to see the positive stock trend continue into the announcement. After the merger is complete, though, the strength or lack of strength in the combined company's first quarterly report will set the tone for the new AOL-Time Warner stock. Jeff Fischer, who also covers AOL for Motley Fool Research, has been estimating a stock price of around $100 per share by 2003 -- a 66% gain. He bases his estimate on the projected cash flow at the new company, should things go well.